My journey to a simpler life filled with riches

Archive for the ‘Personal Finances’ Category

Income

Income this month was boosted by the receipt of MrRichLife’s small inheritance from his Pop’s estate.

Expenses

Urghhh…another huge month of expenses in the tax/investment category. Both MrRichLife and I are making quarterly PAYG tax instalments to the ATO now, which means at least $3000 in additional tax every 3 months! I need to retire so we don’t have such big incomes I guess. We also had a big bill from the Solicitor for wills and power of attorneys and a big bill from the accountant for getting the Family trust and Company up and running again. Hopefully the Family Trust will help us to reduce our tax burden and make it all worthwhile!

MrRichLife has continued to add to his tool collection for his nano-businesses. He’s got a budget of $7500, so he’s spent about 75% of that so far.

‘Discretionary’ expenses were not too bad this month. Groceries and dining out were surprisingly good, although I did go a little overboard with shopping for some new clothes for me and RichLifeJnr and some xmas gifts.

Savings Rate

This month we saved 51% of our income. It’s not awesome, but considering our ridiculous tax and investment expenses and MrRichLife’s business purchases, it’s not too bad I suppose.

Savings Invested

Just over $45,000 transferred for investing so far this financial year. We are doing well against our savings goal and are well on track to invest over $100,000 this year.

Asset Allocation

We’ve started dollar-cost-averaging into gold, bonds and shares, but they don’t really show up on the chart yet due to small quantities so far. Dipping our toes into the market ever so slowly.

Change in Net Worth

This is a new chart this month. I want to track changes to our Net Worth. We need to make sure that we are continuing to grow our early retirement ‘stash’. Looks like a good month. Net Worth is up nearly $32,000 this month due to savings, inheritance and maturation of a couple of term deposits.

Income

October 2014 has surprisingly been a good one in terms of income, mostly because we received our ‘refund’ of this quarter’s Child Care Rebate and a refund from the tax office for overpaid taxes. WooHoo! Income from the rental properties has dropped a little because we settled on one house this month, but an increase in investment income has almost compensated for the loss.

Expenses

Unfortunately, we had another big month for expenses too. ‘Tax and investment’ expenses were large again this month, mostly because we paid a solicitor to have our wills and power-of-attorneys drawn up. It’s money well spent in terms of estate planning, but all of these big outlays are making it difficult to get our monthly expenses down to a reasonable level. Also had to pay a double lot of insurance for the rental properties. Should have paid our taxes too, but we are late. Oops.

We paid two months worth of ‘childcare’ this month which accounts for the big expense in this category.

MrRichLife has continued to add to his tool collection for his nano-businesses. He’s got a budget of $7500, so he’s spent just over half of that so far.

‘Discretionary’ expenses were ok this month, but only because we don’t need to pay our ginormous gas and electricity bills until next month. Ouch! We need to do more to reduce our energy usage. Also, we overspent on food… again. I’m not too concerned because we had two long weekends in October and instead of spending money on a weekend at a B&B, we enjoyed a staycation.

Savings Rate

This month we saved 53% of our income. I’m pleased to say that so far this year, our passive income has covered all of our expenses. That means everything I earn should be making it’s way into building our retirement stash.

Savings Invested

Just over $33,000 transferred for investing so far this year. We are doing well against our savings goal and are on track to invest $100,000 this year.

Asset Allocation

With the sale of one property this month, I’m taking the opportunity to rebalance our portfolio somewhat. I’ve started dollar-cost-averaging into gold, bonds and shares, but they don’t really show up on the chart yet due to small quantities so far.

Recently, The Escapologist offered a new online wealth building series: The 11 Secrets Every Wealth Builder Must Know. It’s free, so if you are interested, check out The Escapologist. They produce some very thought provoking newsletters.

I’m happy to report that the very first chapter ‘The Secret of the Golden Buckets’, has helped me to answer a question I’ve been pondering for a few months.

But firstly, what are the Golden Buckets? The diagram below illustrates the flow of money in our lives. Income flows from the well and into the first bucket, Spending. Whatever amount we spend each month leaks out of our Spending bucket, leaving less to flow to the Saving and Investing buckets. The concept is pretty obvious so I won’t belabour the point.

What was interesting to me was the difference between saving and investing. In this article, the author distinguishes between them because he believes it will help to acquire wealth safely.

Saving and investing are the same in the sense that you are setting aside some portion of your current earnings for the future. The difference is the purpose of saving is to safeguard that set-aside money, whereas the purpose of investing is to grow it.

The Savings bucket

There are two main things the Savings bucket should comprise of.

Anything you are saving for that you will be paying for in less than seven years, such as saving for a new car, upcoming holiday, home renovation project, deposit on a house or living expenses once retired.

Start Over Again (SOA) fund – the money you put aside in case of a financial disaster. To start, your SOA fund should have a minimum of three months’ living expenses.

Money in the Savings bucket should only be in super-safe investments – investments that are highly unlikely to go down in value in the next 10 years. These include bank savings accounts, term deposits and safe bonds with short-term durations.

The Investing bucket

The purpose of the investing bucket is to grow wealth. This is the bucket used to fund all future, long-term expenditures (i.e. more than seven years).

If you are young, you may use this bucket to put aside money for your children’s school expenses. But for the most part, the money in this bucket will be for your retirement. And when you look at investment returns from a long-range perspective like that, even a few percentage points can make a huge difference.

The Investing bucket therefore, is where you can theoretically afford to take a few more calculated risks.

In my last post, I indicated that we need to get our expenses down by 25% if we have a hope of me successfully retiring at 40. By successful, I mean we don’t go broke before we die. Today, I thought I’d spend a bit of time looking at what our expenses consisted of last financial year.

Figure 1: MsRichLife FY13-14 Expenses

Figure 2: MrRichLife FY13-14 Expenses

Savings (50.0%)

Last year we saved 42.3% of my net pay (after tax and rent) and about 65% of MrRichLife’s income. We could have done better than this, but as you’ll see we had some big, one off expenses last year which shouldn’t be repeated this year. It’s not too bad considering we weren’t being particularly conscious of our spending. There is much room for improvement though, and I’ve set the immediate goal of saving at least 50% of my net pay each month from here on.

Income Tax and Investment Expenses (12.0%)

Income taxes (in addition to what is taken from my pay) accounted for 11.7% of my expenses. Ouch! I called the ATO the other day and questioned how much I’m paying to them every three months and told them to go back through my payments to check they are correct. Guess what! I was overcharged $1500 and I can expect a refund soon. I hate how much I send to the Tax office, but there is little I can do to reduce the amount at this point. We are planning on selling one house soon and moving the cash into MrRichLife’s account, so that should help.

Investment Expenses mostly consists of Landlord insurance payments that are not taken care of by my property manager. They have slowly been creeping higher and higher and it’s about time I get some new quotes!

Rent (8.0%)

At the moment we are very happy with our rental arrangements so won’t be making any savings in this category.

Motorbike (6.8%)

MrRichLife bought himself a motorbike last year. Hopefully this one off expense won’t be repeated regularly!

Groceries, Dining Out & Alcohol (6.1%)

This category presents the biggest opportunity to make savings in our budget. These calculations don’t capture all the food and coffees we buy with cash, so in reality we are spending more on this category than indicated. I’d like to work with MrRichLife to work out a plan to reduce this item significantly. I’ll endeavour to write a separate post on what we come up with.

Childcare (4.8%)

In reality we get 50% Child Care Rebate so this expense is not as big as shown here. We could cut back on days, but honestly we think we’ve found the right balance for our family with The Boy in childcare for 2-3 days a week.

Bills (2.9%)

Gas, Electricity, Phone, Internet, Insurance and Medical. I know that our Gas and Electricity usage has crept up this year. We’ve recently had our central heating replaced so hopefully that will be operating more efficiently than the old one.

Holidays (2.0%)

Most of our holiday expenses have been incurred in visiting our families interstate. This also includes flights that I’ve already paid for an upcoming trip to see my family and attend to my high school reunion. We’ve also been away for a couple of weekends as a family. I love to travel and am prepared to cut other things out of our budget to ensure we can continue to do so. I don’t intend to reduce spending in this category, and actually expect it to rise this year.

Emergency Cash (2.0%)

We keep a bit of cash available in case of emergency, so this isn’t actually an expense. The withdrawal hopefully shouldn’t need to be repeated in future.

Car (1.8%)

We only have one car, and we don’t put a lot of kilometres on it each week. MrRichLife does most of the maintenance himself to save some money. I could ride my bike some of the time to save a bit of fuel and wear and tear, so I’ll revisit that topic in a separate post.

Job Expenses (1.1%)

Most of these expenses are reimbursed or tax deductible, so this category needs no work.

Other (4.3%)

The ‘other’ category captures all the smaller categories, that do add up to a lot. These are things like shopping, clothes, entertainment, hobbies, personal care etc. Given that all these ‘little’ expenses add up to a large chunk of our budget, we probably should see where we can cut down.

Summary

That was an interesting exercise to undertake. The most expenses were incurred through extra income tax payments and investments expenses. This is something I need to spend some time analysing further. There were also quite a lot of one off purchases and withdrawals last year which shouldn’t be repeated this year. The next biggest opportunities for improvement are in the ‘food’ and ‘other’ category. It might be worth setting ourselves some challenges to start bringing these expenses down.

I’ve recently discovered Mr Money Mustache and have consumed all of his posts and delved headlong into the Forums. What a treasure trove!

One of the themes of his blog is The 4% Rule, which is essentially a rough guide to how much you need to retire. This little figure is based on The Trinity Study, a study to determine “safe withdrawal rates” from retirement portfolios that contain stocks and thus grow (or shrink) irregularly over time. This study defined ‘success’ as not going broke during a 30-year test period.

So if I accept that a 4% withdrawal rate won’t leave me broke in my old age, then the assumption is that I would need a portfolio of $1 Million to give me $40,000 per annum.

The interesting thing for me, is that (as MMM points out) the trinity study assumes a retiree will:

never earn any more money through part-time work or self-employment projects

never collect a single dollar from social security or any other pension plan

never adjust spending to account for economic reality like a huge recession

never substitute goods to compensate for inflation or price fluctuation

never collect any inheritance from the passing of parents or other family members

and never spend less as they age

I fully expect that we will do a bit in our retirement to keep some money trickling in; we expect to get a bit from superannuation in our old age (but when or how much is yet to be seen); and we know that we can downscale our life if circumstances require it. So, in short, the 4% rule is theoretically quite conservative.

After reading all of this, I started to feel like maybe it was possible to retire easily at 40. However being the careful person that I am, I wanted to test some assumptions by running a few scenarios. This is where some Early Retirement calculators came in very handy. You can check them out here:

Superannuation or pension of $30,000 per annum starting when I turn 60.

Additional savings of $50,000 per annum until 40 (retirement age).

Scenario 1. In the first simulation, I assumed that we continued to spend like we currently do (minus things like childcare that we would no longer use), that we would continue to rent a house in our retirement and that we make no additional income. This scenario has a 63-71% chance of success (i.e. that we don’t go broke).

Scenario 2. On the second run, I cut our living expenses by 25%. This time, we have a 95-100% chance of success. Okay, that sounds better, but we don’t really want to rent forever. We want to buy ‘The Farm’ when we retire! Let’s see what happens.

Scenario 3. Ok, so this time we bought ‘The Farm’ for $500,000 upon retirement. I reduced our expenses by the equivalent of the rent we wouldn’t pay. This scenario has a 73-81% chance of success, which is not good enough for conservative old me.

Scenario 4. What if we bring in a small income of $10,000 per annum in retirement? Well, it looks like we have 97-99% chance of success! That will do!

So what does all of this mean? Essentially I can retire easily at 40 IF we reduce our current living expenses by 25% before then. If we want to buy ‘The Farm’ then we have to be prepared to find an additional $10,000 per annum from some side hustles, which I think is more than achievable.

That was a very worthwhile exercise and I feel like we now have something concrete to work towards:

Develop a budget such that we can live comfortably on 25% less than what we currently spend (not including childcare and other work-related expenses that would disappear in retirement).

Identify some opportunities for side hustles that could bring in $10,000 per year.

Inspired by posts from Fabulous Financials and Wide Open Wallet I decided to analyze where my money went last year. For simplicity, I’m only looking at my expenses here in the USA. I have investments incurring some expenses back in Australia, but I like to think of my Australian budget separate to my USA budget. I keep the majority of my money in Australia and have some of my pay sent to the USA for Hubby and I to live on while we are here.

Here’s what my USA expenses looked like for 2008:

As you can see a massive 48% on our expenses went on travelling. The vast majority of our travels were made in conjunction with my work trips so I was in receipt of quite generous travelling allowances. Hubby and I usually travel together on far less than I receive. I’ll have to sit down and work out how much we actually spent once those allowances are taken into consideration.

Food made up 12% of our expenses and that included grocery shopping and dining out. In reality ‘groceries’ also included household cleaning products, bathroom products and dog food.

Hubby and I managed to spend 16% of our budget on ourselves. Hubby used most of his on hobbies and to be honest I don’t know exactly where I used most of mine. It’s terrible that I have thousands of dollars virtually unaccounted for.

Bills made up 5% of expenditure and the car was a further 5%.

The most shocking discovery in this exercise was that 5% of our expenses were categorized as miscellaneous, un-categorized or cash. What that really means is that 5% of our expenses have disappeared and I don’t know where they went.

I have been tracking my expenses like this for about 10 years. I always thought I was doing a reasonable job of tracking where our money went, but after doing this exercise I now realise that close to 10% of our expenses are not really accounted for. During the month of February, Hubby and I have set ourselves challenge of tracking every single cent that we spend. Hopefully this will get us back into the good habit of being accountable for all our expenses.

I’m in the USA for another two years so there is no point buying another house back in Australia now;

My finances are such that I probably couldn’t get a loan for another property now anyway; and

Apparently house prices have started dropping in Australia, so I can’t really recoup a profit from one of the other houses if I sold it.

Still, it doesn’t stop me dreaming. I love having my own place. I envisage having my own garden, putting in rainwater tanks and a greywater recycling system. I foresee a solar system on the roof. I want to live close to town so that we can do without a second vehicle and so we can walk or ride to shops, cafes and work. If we rent, we won’t be able to do any of these things.

Unfortunately, in order to buy a property close to the town I’m thinking, with enough land to have a garden and fruit trees, it’s going to cost a pretty penny. *Sigh* I guess I’m going to have to relegate this dream to the ‘longer term’ pile and just focus on the baby steps to reach that goal.